Tag Archives: ETN

The popular exchange-traded note whose share issuance was capped last week by J.P. Morgan Chase (JPM) is already trading at a premium. Investors who hold the JPMorgan Alerian MLP Index exchange-traded note (AMJ) can either cash out now with unexpected profits or they can ride the note’s unusual mechanics higher in hopes of even bigger gains.

But the outcome behind Door #2 is unpredictable. Nobody wants to be holding the bag if JPM suddenly reopens new shares. J.P. Morgan hasn’t said whether it will take that step. But if it does, the investment’s premium, which resembles what you see in closed-end funds, would collapse in a hurry. That’s a risk that investors will bear if they stick with this tracker of rich-yielding master limited partnerships.

The crux of the issue is that AMJ is no longer just a bet on master limited partnerships. It’s also a bet on what other investors who hold or want to hold the same J.P. Morgan note will do.

At the moment, there’s a 45-cent premium in AMJ’s market price versus the underlying assets, or about 1.2%. It will get bigger if more investors pile in.

“This is a free gift. But how long do you watch the premium build before you sell the shares out? It’s a question that the owners of AMJ have to ask themselves,” Chris Hempstead, a director at WallachBeth Capital tells Barrons.com.

JPMorgan Chase (NYSE: JPM) announced on Thursday that will cap issuance for the popular Alerian MLP Index ETN (NYSE: AMJ) at 129 million notes. The move is significant because with almost $4.2 billion in assets under management, the Alerian MLP Index ETN is the largest exchange-traded product offering exposure to MLPs.

The universe of MLP exchange-traded products has grown rapidly, but the Alerian MLP Index ETN and the ALPS Alerian MLP ETF (NYSE: AMLP) combine for the bulk of the roughly $7.5 billion in MLP exchange-traded products assets under management, according to data furnished by WallachBeth Capital.

New York-based WallachBeth, one of the largest ETF execution firms in the U.S., said JPMorgan’s decision to cap issuance on AMJ could open the door for new MLP ETFs to gain assets. In a note published by the firm today, AMLP, the newly minted Yorkville High Income MLP ETF (NYSE: YMLP) and the Global X MLP ETF (NYSE: MLPA), another new fund, were cited as examples of fund that could potentially benefit from the AMJ issuance cap.

“When an ETP no longer allows for creations, the fund starts to trade like a closed end fund,” WallachBeth said in the note. The reasoning behind this is that the arbitrage mechanism which allows market makers to sell the ETP is no longer available. Without the ability to create, market makers may be less inclined to sell the fund short versus a hedge of the underlying assets.”

According to Benzinga.com’s ETF Professor, its not necessarily the size of the ETF, but the motion when it comes to investor returns.

From Benzinga’s April 23 edition:

“..There are plenty of instances in life when bigger is better. When it comes to exchange-traded products, bigger isn’t always associated with better [4]. At least when it comes to what should be investors’ primary consideration: Returns.

It has been documented that ETFs and ETNs with low average daily volume [5] and an assets under management number that may not be viewed as impressive by the so-called experts can outperform. In fact, all investing in an ETF with a bigger AUM total does is lead investors to a bigger fund, not larger returns [6].

Fortunately, a move away AUM and average daily volume as the primary determinants of an ETF’s worth is already under way.

“Some of the traders we talk to are using AUM and ADV a lot less now,” said Chris Hempstead, head of institutional sales and trading at WallachBeth Capital. “Some hedge funds using ETFs to hedge might use the larger ETFs because they just need short-term exposure, but buy-side traders are using AUM and ADV less and less.”

The statistics back up the assertion that bigger isn’t always better with ETFs. In an interview with Benzinga, Hempstead noted that in the case of the nine Select Sector SPDRs, all have been outperformed by a comparable fund of smaller stature on a year-to-date basis. Continue reading →

Observed Chris Hempstead, the head of ETF trading for WallachBeth Capital, “the halt in the creation process caused the product to trade at an unnatural premium–as much as 80%– to the underlying NAV since the creation halt announcement was made. For more than a month, hedge fund traders have been attempting to arbitrage the dislocation in pricing-and more than a few had based their strategies on the premise the creation process would not be resumed. ”

Credit Suisse threw a fly into that ointment on Thursday night, when the firm announced it was re-opening the issuance of new units and, as Hempstead pointed out in desk notes to clients of his firm late Thursday night, “you can expect TVIX premiums to NAV to evaporate significantly, if not entirely when trading re-opens.”

Are there other products that display the same unusual premium to NAV ‘features’?. Hempstead suggests that hedge fund traders who are dabbling in volatility-flavored products should take a second look at Market Vectors China ETF (PEK) as well as ProShares Trust Ultra VIX Short: UVXY Continue reading →